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Today’s Wealth Destruction Is Hidden by Government Debt – Philipp Bagus – Mises Daily

November 23, 2013 4:21 pm / Leave a comment

Today’s Wealth Destruction Is Hidden by Government Debt – Philipp Bagus – Mises Daily.

Still unnoticed by a large part of the population is that we have been living through a period of relative impoverishment. Money has been squandered in welfare spending, bailing out banks or even — as in Europe — of fellow governments. But many people still do not feel the pain.

However, malinvestments have destroyed an immense amount of real wealth. Government spending for welfare programs and military ventures has caused increasing public debts and deficits in the Western world. These debts will never be paid back in real terms.

The welfare-warfare state is the biggest malinvestment today. It does not satisfy the preferences of freely interacting individuals and would be liquidated immediately if it were not continuously propped up by taxpayer money collected under the threat of violence.

Another source of malinvestment has been the business cycle triggered by the credit expansion of the semi-public fractional reserve banking system. After the financial crisis of 2008, malinvestments were only partially liquidated. The investors that had financed the malinvestments such as overextended car producers and mortgage lenders were bailed out by governments; be it directly through capital infusions or indirectly through subsidies and public works. The bursting of the housing bubble caused losses for the banking system, but the banking system did not assume these losses in full because it was bailed out by governments worldwide. Consequently, bad debts were shifted from the private to the public sector, but they did not disappear. In time, new bad debts were created through an increase in public welfare spending such as unemployment benefits and a myriad of “stimulus” programs. Government debt exploded.

In other words, the losses resulting from the malinvestments of the past cycle have been shifted to an important degree onto the balance sheets of governments and their central banks. Neither the original investors, nor bank shareholders, nor bank creditors, nor holders of public debt have assumed these losses. Shifting bad debts around cannot recreate the lost wealth, however, and the debt remains.

To illustrate, let us consider Robinson Crusoe and the younger Friday on their island. Robinson works hard for decades and saves for retirement. He invests in bonds issued by Friday. Friday invests in a project. He starts constructing a fishing boat that will produce enough fish to feed both of them when Robinson retires and stops working.

At retirement Robinson wants to start consuming his capital. He wants to sell his bonds and buy goods (the fish) that Friday produces. But the plan will not work if the capital has been squandered in malinvestments. Friday may be unable to pay back the bonds in real terms, because he simply has consumed Robinson’s savings without working or because the investment project financed with Robinson’s savings has failed.

For instance, imagine that the boat is constructed badly and sinks; or that Friday never builds the boat because he prefers partying. The wealth that Robinson thought to own is simply not there. Of course, for some time Robinson may maintain the illusion that he is wealthy. In fact, he still owns the bonds.

Let us imagine that there is a government with its central bank on the island. To “fix” the situation, the island’s government buys and nationalizes Friday’s failed company (and the sunken boat). Or the government could bail Friday out by transferring money to him through the issuance of new government debt that is bought by the central bank. Friday may then pay back Robinson with newly printed money. Alternatively the central banks may also just print paper money to buy the bonds directly from Robinson. The bad assets (represented by the bonds) are shifted onto the balance sheet of the central bank or the government.

As a consequence, Robinson Crusoe may have the illusion that he is still rich because he owns government bonds, paper money, or the bonds issued by a nationalized or subsidized company. In a similar way, people feel rich today because they own savings accounts, government bonds, mutual funds, or a life insurance policy (with the banks, the funds, and the life insurance companies being heavily invested in government bonds). However, the wealth destruction (the sinking of the boat) cannot be undone. At the end of the day, Robinson cannot eat the bonds, paper, or other entitlements he owns. There is simply no real wealth backing them. No one is actually catching fish, so there will simply not be enough fishes to feed both Robinson and Friday.

Something similar is true today. Many people believe they own real wealth that does not exist. Their capital has been squandered by government malinvestments directly and indirectly. Governments have spent resources in welfare programs and have issued promises for public pension schemes; they have bailed out companies by creating artificial markets, through subsidies or capital injections. Government debt has exploded.

Many people believe the paper wealth they own in the form of government bonds, investment funds, insurance policies, bank deposits, and entitlements will provide them with nice sunset years. However, at retirement they will only be able to consume what is produced by the real economy. But the economy’s real production capacity has been severely distorted and reduced by government intervention. The paper wealth is backed to a great extent by hot air. The ongoing transfer of bad debts onto the balance sheets of governments and central banks cannot undo the destruction of wealth. Savers and pensioners will at some point find out that the real value of their wealth is much less than they expected. In which way, exactly, the illusion will be destroyed remains to be seen.

 

The World’s 2170 Billionaires Control $33 Trillion In Net Worth, Double The US GDP | Zero Hedge

November 23, 2013 4:18 pm / Leave a comment

The World’s 2170 Billionaires Control $33 Trillion In Net Worth, Double The US GDP | Zero Hedge.

Before it became a conspiracy fact, the traditional response to all suggestions of a massive Libor/FX/commodity/mortgage rigging cartel was a simple if stupid one: too many people are involved and so it can never be contained. As it turns out not only can it be contained, but when the interests of the “conspiracy” participants are alligned, it can continue for decades. Naturally, the same applies for the pinnacle of the global wealth pyramid: the world’s billionaires and their plan of wealth preservation and accumulation.

Not only have the world’s richest been the biggest beneficiaries of the monetary and fiscal policies since 2009, with the current 2170 global billionaires representing a 60% increase since 2009according to UBS, but their consolidated net worth has more than doubled from $3.1 trillion in 2009 to $6.5 trillion now. At the same time, the net worth of the “bottom 90%” of the world’s not so lucky population, has declined. Yet, somehow, the Fed is still revered.

Naturally, as in global financial conspiracies, the question arises: is it possible that instead of representing the interests of the general population, what the central banks simply do is follow the instructions of a far smaller cabal, that of the world’s uber wealthy?

In case there is any confusion, the above is a rhetorical question. It goes without saying that what the world’s largest wealth accumulators want above all else, is to preserve a status quo that allows their capital-based wealth to increase as fast and as much as possible in a regime of reflating asset prices, while keeping the bulk of the world’s population distracted, entertained, and collecting their daily welfare check.

Consider the downside: according to a new report by Wealth-X and UBS, “the average billionaire is incredibly well connected, with a social circle worth US$15 billion – five times the net worth of the average billionaire. This figure is based on a calculation of the net worth of only the three top connections of billionaires, and so it is likely to be even higher when considering the number of UHNW individuals the average billionaire interacts with while attending various meetings, dinners, and events.” It is during these “meetings, dinners and events” that the real policy defining the future of the world is set – far beyond the theater of a corrupt, dysfunctional Congress or incompetent Executive. And the policy is simple – “more for us, nothing for everyone else.”

The bottom line from Weatlh X: “factoring in all of the connections between the world’s billionaires, this equates to a total social circle worth a combined US$33 trillion” or double the GDP of the US.

The estimated “circle of influence” among the friends of just the US’ richest is shown below.

 

Debt and Taxes: Symptoms of Our Core Problem | Dylan Ratigan

November 23, 2013 11:52 am / Leave a comment

Debt and Taxes: Symptoms of Our Core Problem | Dylan Ratigan.

The three charts below offer insight to the rottenness at the core of a banking and political system that relies entirely on the money of others–taxpayers, pensioners, those who pay insurance and, most disturbingly, future American earnings–to create short-term, private-sector income around housing and finance. With these profits, the banking system deals in politicians by offering political bulletproofing in the form of low-cost financing for housing using–you guessed it– other people’s money.

Until we deal with this problem, which is deeply entrenched in our election finance system, our government will continue to borrow and tax us to serve its short-term interests even as our lives become more expensive and offer less in return.

First, take a look at our Long-Term Debt:

2013-10-17-1.jpg

Our nation’s leviathan debt expansion began in 2001. The War on Terror and President Bush’s Medicare Part D–each implemented without proper consideration for costs, the possibility of a long, protracted war, US healthcare monopolies and our out-of-control drug pricing.

Debt exploded in 2008 as the US government provided a multi-trillion dollar safety net to insolvent banks while attempting to provide a cushion for individual citizens in the form of social services, which exploded following the spike in unemployment (caused in large part by the lending contraction from the banks).

The stunning chart below shows what happens when an extractive alliance between bankers chasing bonuses and politicians chasing votes. The game is cemented by profits generated by banker custody of the money of others in order to finance housing. These profits are partially invested in the pockets of those politicians willing to continue providing favorable legislation. And, of course, the illusion of growth helps keep these elected officials firmly in control of their congressional seats.

The chart below is represents more than a century of housing data. Look at the stunning distortion in home prices this extractive alliance created.

2013-10-17-2.jpg

A few things drove this. In no particular order:

Politics – Homeownership became a political metaphor for freedom and the “American Dream.” Left-leaning politicians even articulated it as a right as important as freedom of speech and religion.
Private-Sector Marketing – Like diamonds or tulips, billions were invested in the glamorization of homeownership as the peak of adult social status.
End of the 30-Year Bond – Treasury Secretary Robert Rubin abolished the 30-year bond, forcing pension and insurance portfolio managers to move billions of dollars into the only government-backed 30-year duration investment left, which just so happened to be housing bonds sold by thegovernment agencies Fannie Mae and Freddie Mac.
Zero percent interest from the Federal Reserve
New Default Swapping Derivatives – These instruments were designed to eliminate all risk from banks and transfer it to the investment pools of insurance companies and pensions.
The housing price collapse seen in the chart above precipitated lending contraction, which led to layoffs and a slowdown in new business formation. This, in turn, caused a spike in unemployment which exacerbated the housing decline in a vicious cycle as the newly jobless could no longer buy homes or pay mortgages

Check out the spike in long-term unemployment below:

2013-10-17-3.jpg

When faced with all of this in 2008 and 2009, our President and Congress decided to ignore all of the underlying factors and rely on our central bank to manufacture trillions of new dollars to stabilize the banks while allowing our debt to spiral out of control and looking to increased taxes to stanch the bleeding. All of this was driven by the decline in housing, where the bankers and politicians had all of our eggs stored. The unemployment some politicians ascribe to a softening of American spirit was actually caused by the reckless lending from banks and our government in between 2001 and 2008.

The reason our politicians consent to the madness represented in these charts is that they work for the 150,000 people in America who finance our elections, rather the 300 million people whose money they spend.

In a nutshell, until we reform our banking system to eliminate “Too Big Too Fail” and reform our political system to be less corrupted by the 150,000 folks who finance it at our expense, the mainstream dialog is nothing more than useless distraction.

 

Leaked IPCC Report Must Be Catalyst for a Reassessment of Global Food System – Our World

November 23, 2013 11:51 am / Leave a comment

Leaked IPCC Report Must Be Catalyst for a Reassessment of Global Food System – Our World.

In case it wasn’t already clear, there is now consensus that climate change will have a significant impact on the world’sfood systems. A leaked draft of the newest report from the United Nations Intergovernmental Panel on Climate Change (IPCC) underscored the serious threat climate change poses for meeting demand for food in the coming decades. The contents of the report — though not a revelation — should be a catalyst for a complete reassessment of the global food system.

Increasingly, it is not a question of if or when a changing climate will impact our food, but rather how farms and agricultural systems will choose to adapt.

In a warming world there will be bursts of heavy rain and prolonged drought that will, as the UN puts it, exacerbate water shortages and shift growing seasons. Some of the biggest impacts from climate change will be felt on farms, with the UN estimating that yields of staple crops such as corn, wheat and rice could be depressed by as much as 2 percent each decade for the rest of the century.

What all of this will actually mean for the world’s hungry though, and what we can do about it is another story entirely. As awareness about the impacts of climate change increases, the debate about how to achieve climate resiliency and feed the world intensifies.

Food sector emissions are largely the result of industrial livestock operations, fertiliser and chemical use, carbon loss from soils on industrial farms, and significantly, deforestation driven by a handful of corporate controlled commodities.

We believe we cannot have these conversations without first acknowledging the role the food system itself currently plays in the crisis. Today, almost every aspect of our modern food system generates greenhouse gas emissions; responsible for one third of the world’s total greenhouse gas emissions every year. Food sector emissions are largely the result of industrial livestock operations, fertiliser and chemical use, carbon loss from soils on industrial farms, and significantly, deforestation driven by a handful of corporate controlled commodities.

Indonesia is now the third largest greenhouse gas emitter in the world, just behind China and the US. This is partially as a result of clearing rainforests and peatlands to make way for industrial palm oil plantations — an ingredient now found in much of the packaged foods lining our supermarket shelves.

The climate solutions from agribusiness players — such as commodity and chemical giants Cargill, Wilmar and Monsanto — are worth questioning in light of the impact these corporations have on our climate. In their PR spin, these corporations suggest that we face key tradeoffs: either accept chemicals, engineered seeds, and synthetic fertilisers as well as expansion of cropland into forests — or face more hunger. Echoing this talking point in 2008, the chair of the board of agrochemical giant Syngenta said: “The world has to choose between technology, deforestation and hunger. I can’t see another way out.”

But this is a false tradeoff. Executives from the companies profiting from industrial agriculture may see little reason to stray from their current path, but in an increasingly resource-constrained and climate-unstable world we cannot support life unless we shift away from input-intensive agriculture that is degrading ecosystems, marginalising small farmers, and failing to eliminate hunger.

So what can we do? We can move quickly and confidently toward climate-friendly farming. Protecting forests, working with smallholder farmers and promoting climate-smart agriculture can address the roots of hunger and the climate crisis.

A global assessment by the UN special rapporteur on the right to food concludes: “… agroecology, if sufficiently supported, can double food production in entire regions within 10 years while mitigating climate change and alleviating rural poverty.”

Research has shown that by using agro-ecological methods, such as organic fertilisers, crop rotations, cover crops and ecological pest management, and focusing on improving the productivity of smallholder farmer communities that already feed one third of the world, we can maintain the health of farmlands. We can also promote increased resilience to climate change impacts and meet our food needs. A global assessment by the UN special rapporteur on the right to food concludes: “… agroecology, if sufficiently supported, can double food production in entire regions within 10 years while mitigating climate change and alleviating rural poverty.”

We need to start incentivising — through corporate agreements, consumer demand, and policy — an agricultural system that’s climate smart and pro-farmer, and at the same time reduce emissions from the industrial food sector as fast as we can.

That means protecting pristine forests from soy or palm oil plantations; reducing dependency on synthetic fertiliser and petroleum-based agrochemicals; working with smallholders to improve the productivity of traditional farming systems; and addressing the rampant waste along the food chain.

Today, an estimated one third of all food that could be eaten is wasted. In some countries such as the US as much as half is wasted. Just focusing on food waste reduction could feed three billion people and still leave enough surplus for countries to provide 130 percent of the nutritional requirements for their entire populations, according to food waste expert, Tristram Stuart.

As a warming climate increasingly affects the world’s farmers, agribusiness will continue to prey on fears of “not enough” to preserve their way of doing business. It’s time to pursue a different path.

 

Divisions on the Left: Jeffrey Sachs Responds to Summers and Krugman | CYNICONOMICS

November 23, 2013 11:51 am / Leave a comment

Divisions on the Left: Jeffrey Sachs Responds to Summers and Krugman | CYNICONOMICS.

Here’s an excerpt from a provocative article written by Jeffrey Sachs this week:

[I]t is very frustrating to read Paul Krugman again today write about our current stagnation with so little reflection on his part that his own preferred stimulus policies can’t solve the problem. It’s of course even worse to hear this from Larry Summers, who Krugman quotes favorably today. Summers was the architect of Obama’s economic policies during the first term, and now he tells us that the administration’s policies haven’t worked.

 

Both Summers and Krugman subscribed to Keynesianism, the idea that larger budget deficits and short-term stimulus after 2008 would revive the economy. Neither of them reflected on how the macroeconomic policies after 2008 should respond to the causes of the crisis. If they had, they might have recommended a very different strategy. And the debt-to-GDP ratio might not have doubled in the meantime as a result of the reliance on Keynesian stimulus policies.

…

Keynesians like to say that there is a savings glut (an excess of saving over investment). They try to remedy it by spurring consumption. This is a mistake. There is an investment shortfall, because the financial, regulatory, and policy barriers to high-return investments have not been addressed. America urgently needs investments in modernized infrastructure, advanced science and technology, and job skills appropriate for the 21st century.

Sachs then builds on his list of preferred supply-side policies.

I took the pointer from Arnold Kling and share his caution about Sachs’ enthusiasm for top-down solutions. That said, I’m always glad to see him weigh in on the big macro issues. He seems able to separate futile policies from those that could conceivably have a net positive effect.

Another perspective that’s similar (but not identical) to Sachs’ message is this:

Keynesians rely heavily on their notion of potential output, while failing to understand that the more important concept is sustainable output. In a credit boom, they ratchet up their potential output estimates roughly alongside observed GDP growth, even as this soars well above what’s truly sustainable. The difference is approximately the malinvestment that occurs in the boom.

And then in the bust, their flawed approach leads to an insistence that demand should be forced back to previous levels, which layers on still more malinvestment.

The real challenge, though, is to create an environment that’s conducive to the growth of sustainable output.

Update:  Here’s yet another interesting perspective on Summers/Krugman that someone e-mailed me, this one from outside the U.S.:  “Immorality Play – Deciphering Krugmanomics.”

 

Arctic 30: freed Briton urges ‘frank discussions’ about future protests | Environment | theguardian.com

November 23, 2013 11:50 am / Leave a comment

Arctic 30: freed Briton urges ‘frank discussions’ about future protests | Environment | theguardian.com.

Kieron Bryan

Freelance videographer Kieron Bryan being released on bail from a detention centre in Saint Petersburg, Russia. Photograph: Liza Udilova/Greenpeace/EPA

There should be frank discussions about future Greenpeace protests following the arrest of activists and journalists in Russia, one of the six Britons freed from detention has said.

 

Freelance journalist Kieron Bryan, one of the Arctic 30 arrested by the Russian authorities over a protest against oil drilling two months ago, said his first trip with the organisation had been a baptism of fire.

 

Greenpeace UK’s executive director, John Sauven, said all those who had been on the Arctic Sunrise vessel had been given a proper briefing about the risks involved and added that the organisation would not be intimidated, although there were no plans for further protest in Russia.

 

The Arctic Sunrise was seized by the Russian authorities and 28 activists and two freelance journalists on board were arrested. All six Britons involved have been granted bail.

 

The group were originally charged with piracy but the authorities said this would be downgraded to hooliganism.

 

Bryan told BBC Radio 4’s Today programme that the group were briefed about the risks before the trip.

 

“We discussed the legal implications of doing a protest in Russia. I remember distinctly piracy being mentioned and the laughter that followed,” he said.

 

“I can’t stress what a shock it was to everyone. We all thought that we would get a rap on the wrists and then be sent away, so to find ourselves facing 10 to 15 years was a very difficult time.”

 

Bryan said Greenpeace should consider the increased political pressure that would apply on future protests relating to oil.

 

He said: “I think there has to be some honest discussion, definitely, and I would love to be part of the discussion with Greenpeace about what happens in future. This was my first trip, so it was a baptism of fire.

 

“But I do think there needs to be some consideration if the changing landscape politically on the global scale … The desire for oil is getting greater and as that happens the political pressure put on people like myself and Greenpeace will increase. So, I hope there are some frank discussions.”

 

Sauven told the programme: “People were given a proper briefing and all the potential issues that could arise were in that briefing.”

 

Asked if the organisation would repeat the protest, Sauven said: “We have got no plans to do that. But … when half the oil spills that happen in the world happen in Russia, should we be silenced? Should we be intimidated? Should journalists not go and report that and expose what’s going on?

 

“This was an entirely peaceful process. We have been going to the Russian arctic for nearly three decades. We’ve been up there campaigning against Russian whaling, we’ve been up there actually in far more challenging situations, even campaigning against Russian nuclear testing when we ran a campaign to get a ban on nuclear testing around the world – a ban that we won, and a ban on whaling that we won.

 

“I hope that we can also protect the Arctic but we are not going to do that if we are intimidated or silent.”

Government Excuses for Letting the Banksters Off Scot-Free Are Bogus Washington’s Blog

November 23, 2013 9:53 am / Leave a comment

Government Excuses for Letting the Banksters Off Scot-Free Are Bogus Washington’s Blog.

The Failure To Punish Wall Street Criminals Is The Core Cause Of Our Sick Economy

U.S. Attorney General Eric Holder said:

I am concerned that the size of some of these institutions [banks] becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy

As we’ve repeatedly noted, this is wholly untrue.

If the big banks were important to the economy, would so many prominent economists, financial experts and bankers be calling for them to be broken up?

If the big banks generated prosperity for the economy, would they have to be virtually 100% subsidized to keep them afloat?

If the big banks were helpful for an economic recovery, would they be prolonging our economic instability?

In fact, failing to prosecute criminal fraud has been destabilizing the economy since at least 2007 … and will cause huge crashes in the future.

After all, the main driver of economic growth is a strong rule of law.

Nobel prize winning economist Joseph Stiglitz says that we have to prosecute fraud or else the economy won’t recover:

The legal system is supposed to be the codification of our norms and beliefs, things that we need to make our system work. If the legal system is seen as exploitative, then confidence in our whole system starts eroding. And that’s really the problem that’s going on.

***

I think we ought to go do what we did in the S&L [crisis] and actually put many of these guys in prison. Absolutely. These are not just white-collar crimes or little accidents. There were victims. That’s the point. There were victims all over the world.

***

Economists focus on the whole notion of incentives. People have an incentive sometimes to behave badly, because they can make more money if they can cheat. If our economic system is going to work then we have to make sure that what they gain when they cheat is offset by a system of penalties.

Nobel prize winning economist George Akerlof has demonstrated that failure to punish white collar criminals – and instead bailing them out- creates incentives for more economic crimes and further destruction of the economy in the future.

Indeed, professor of law and economics (and chief S&L prosecutor) William Black notes that we’ve known of this dynamic for “hundreds of years”. And see this, this, this and this.

(Review of the data on accounting fraud confirms that fraud goes up as criminal prosecutions go down.)

The Director of the Securities and Exchange Commission’s enforcement division told Congress:

Recovery from the fallout of the financial crisis requires important efforts on various fronts, and vigorous enforcement is an essential component, as aggressive and even-handed enforcement will meet the public’s fair expectation that those whose violations of the law caused severe loss and hardship will be held accountable. And vigorous law enforcement efforts will help vindicate the principles that are fundamental to the fair and proper functioning of our markets: that no one should have an unjust advantage in our markets; that investors have a right to disclosure that complies with the federal securities laws; and that there is a level playing field for all investors.

Paul Zak (Professor of Economics and Department Chair, as well as the founding Director of the Center for Neuroeconomics Studies at Claremont Graduate University, Professor of Neurology at Loma Linda University Medical Center, and a senior researcher at UCLA) and Stephen Knack (a Lead Economist in the World Bank’s Research Department and Public Sector Governance Department) wrote a paper called Trust and Growth, showing that enforcing the rule of law – i.e. prosecuting white collar fraud – is necessary for a healthy economy.

One of the leading business schools in America – the Wharton School of Business – published an essay by a psychologist on the causes and solutions to the economic crisis. Wharton points out that restoring trust is the key to recovery, and that trust cannot be restored until wrongdoers are held accountable:

According to David M. Sachs, a training and supervision analyst at the Psychoanalytic Center of Philadelphia, the crisis today is not one of confidence, but one of trust. “Abusive financial practices were unchecked by personal moral controls that prohibit individual criminal behavior, as in the case of [Bernard] Madoff, and by complex financial manipulations, as in the case of AIG.” The public, expecting to be protected from such abuse, has suffered a trauma of loss similar to that after 9/11. “Normal expectations of what is safe and dependable were abruptly shattered,” Sachs noted. “As is typical of post-traumatic states, planning for the future could not be based on old assumptions about what is safe and what is dangerous. A radical reversal of how to be gratified occurred.”

People now feel more gratified saving money than spending it, Sachs suggested. They have trouble trusting promises from the government because they feel the government has let them down.

He framed his argument with a fictional patient named Betty Q. Public, a librarian with two teenage children and a husband, John, who had recently lost his job. “She felt betrayed because she and her husband had invested conservatively and were double-crossed by dishonest, greedy businessmen, and now she distrusted the government that had failed to protect them from corporate dishonesty. Not only that, but she had little trust in things turning around soon enough to enable her and her husband to accomplish their previous goals.

“By no means a sophisticated economist, she knew … that some people had become fantastically wealthy by misusing other people’s money — hers included,” Sachs said. “In short, John and Betty had done everything right and were being punished, while the dishonest people were going unpunished.”

Helping an individual recover from a traumatic experience provides a useful analogy for understanding how to help the economy recover from its own traumatic experience, Sachs pointed out. The public will need to “hold the perpetrators of the economic disaster responsible and take what actions they can to prevent them from harming the economy again.” In addition, the public will have to see proof that government and business leaders can behave responsibly before they will trust them again, he argued.

Note that Sachs urges “hold[ing] the perpetrators of the economic disaster responsible.” In other words, just “looking forward” and promising to do things differently isn’t enough.

Robert Shiller – one of the top housing experts in the United States – says that the mortgage fraud is a lot like the fraud which occurred during the Great Depression. As Fortune notes:

Shiller said the danger of foreclosuregate — the scandal in which it has come to light that the biggest banks have routinely mishandled homeownership documents, putting the legality of foreclosures and related sales in doubt — is a replay of the 1930s, when Americans lost faith that institutions such as business and government were dealing fairly.

Indeed, it is beyond dispute that bank fraud was one of the main causes of the Great Depression.

Economist James K. Galbraith wrote in the introduction to his father, John Kenneth Galbraith’s, definitive study of the Great Depression, The Great Crash, 1929:

The main relevance of The Great Crash, 1929 to the great crisis of 2008 is surely here. In both cases, the government knew what it should do. Both times, it declined to do it. In the summer of 1929 a few stern words from on high, a rise in the discount rate, a tough investigation into the pyramid schemes of the day, and the house of cards on Wall Street would have tumbled before its fall destroyed the whole economy.

In 2004, the FBI warned publicly of “an epidemic of mortgage fraud.” But the government did nothing, and less than nothing, delivering instead low interest rates, deregulation and clear signals that laws would not be enforced. The signals were not subtle: on one occasion the director of the Office of Thrift Supervision came to a conference with copies of the Federal Register and a chainsaw. There followed every manner of scheme to fleece the unsuspecting ….

This was fraud, perpetrated in the first instance by the government on the population, and by the rich on the poor.

***

The government that permits this to happen is complicit in a vast crime.

Galbraith also says:

There will have to be full-scale investigation and cleaning up of the residue of that, before you can have, I think, a return of confidence in the financial sector. And that’s a process which needs to get underway.

Galbraith recently said that “at the root of the crisis we find the largest financial swindle in world history”, where “counterfeit” mortgages were “laundered” by the banks.

As he has repeatedly noted, the economy will not recover until the perpetrators of the frauds which caused our current economic crisis are held accountable, so that trust can be restored. See this, this andthis.

No wonder Galbraith has said economists should move into the background, and “criminologists to the forefront.”

The bottom line is that the government has it exactly backwards. By failing to prosecute criminal fraud, the government is destabilizing the economy … and ensuring future crashes.

Earlier this month, a prominent New York Federal Court Judge – and former Chief of the fraud unit for the U.S. Attorney’s Office for the Southern District of New York (Jed Rakoff) – said:

Not a single high level executive has been successfully prosecuted in connection with the recent financial crisis ….

[If] the Great Recession was in material part the product of intentional fraud, the failure to prosecute those responsible must be judged one of the more egregious failures of the criminal justice system in many years.

***

The stated opinion of those government entities asked to examine the financial crisis overall is not that no fraud was committed. Quite the contrary. For example, the Financial Crisis Inquiry Commission, in its final report, uses variants of the word “fraud” no fewer than 157 times in describing what led to the crisis, concluding that there was a “systemic breakdown,” not just in accountability, but also in ethical behavior. As the Commission found, the signs of fraud were everywhere to be seen, with the number of reports of suspected mortgage fraud rising 20-fold between 1998 and 2005 and then doubling again in the next four years. As early as 2004, FBI Assistant Director Chris Swecker, was publicly warning of the “pervasive problem” of mortgage fraud, driven by the voracious demand for mortgage-backed securities. Similar warnings, many from within the financial community, were disregarded, not because they were viewed as inaccurate, but because, as one high level banker put it, “A decision was made that ‘We’re going to have to hold our nose and start buying the product if we want to stay in business.’”

The prevailing view of many government officials (as well as others) was that the crisis was in material respects the product of intentional fraud.

[The Department of Justice doesn’t disagree.] Attorney General Holder himself told Congress that “it does become difficult for us to prosecute them when we are hit with indications that if we do prosecute – if we do bring a criminal charge – it will have a negative impact on the national economy, perhaps even the world economy.”

***

No one that I know of has ever contended that a big financial institution would collapse if one or more of its high level executives were prosecuted, as opposed to the institution itself.

***

The Department of Justice has never taken the position that all the top executives involved in the events leading up to the financial crisis were innocent, but rather has offered one or another excuse for not criminally prosecuting them – excuses that, on inspection, appear unconvincing. So, you might ask, what’s really going on here?

***

[Deferred prosecutions – the current government approach of letting big banks off easy and leaving the individual fraudsters alone – are not the way to go.] Although it is supposedly justified in terms of preventing future crimes, I suggest that the future deterrent value of successfully prosecuting individuals far outweighs the prophylactic benefits of imposing internal compliance measures that are often little more than window-dressing. Just going after the company is also both technically and morally suspect. It is technically suspect because, under the law, you should not indict or threaten to indict a company unless you can prove beyond a reasonable doubt that some managerial agent of the company committed the alleged crime; and if you can prove that, why not indict the manager? And from a moral standpoint, punishing a company and its many innocent employees and shareholders for the crimes committed by some unprosecuted individuals seems contrary to elementary notions of moral responsibility.

These criticisms take on special relevance, however, in the instance of investigations growing out of the financial crisis, because, as noted, the Department of Justice’s position, until at least very, very recently, is that going after the suspect institutions poses too great a risk to the nation’s economic recovery.

Rakoff thoroughly debunks the government’s other lame excuses for failing to prosecute Wall Street criminals as well, such as the “difficulty” of proving “intent” or the “sophistication” of the counter parties.

Unfortunately, the government made it official policy not to prosecute fraud, even though criminal fraud is the main business model adopted by the giant banks.

Indeed, Judge Rakoff notes that the government had a large hand in creating the fraud in the first place.  In fact, the government has done everything it can to cover up fraud, and has been activelyencouraging criminal fraud and attacking those trying to blow the whistle.

The failure to punish the fraudsters is the core cause of our sick economy.

 

The Ring of Fire’s Future Is Now a Burning Question | Sunny Freeman

November 23, 2013 9:53 am / Leave a comment

The Ring of Fire’s Future Is Now a Burning Question | Sunny Freeman.

Mining giant Cliffs Natural Resources’ decision to halt work on the largest project in northern Ontario’s Ring of Fire region has aroused a sudden interest in the lumbering development.

The opposition at Queen’s Park pounced to lay blame on the province for the squandered opportunity.

Financial analysts scurried to advise clients on what it means for their shares. And usually blasé news outlets called on pundits to discuss whether the loss of the U.S. mining giant was a death knell for the much-hyped but little-understood development.

The biggest player in the Ring of Fire, a 5,000 square kilometre tract of land in Ontario’s Far North that is said to hold a potential $50 billion in mineral deposits, announced late Wednesday it is halting work on its $3.3 billion chromite project indefinitely, blaming, for the most part, an “uncertain timeline.”

If Cliffs’ decision to stop development is the death of that high stakes mining discovery, it was anything but a sudden one.

This past summer, I was one of just two reporters covering a historic three-day meeting of the Matawa First Nations, a group that represents many of the communities that are affected by Ring of Fire development. As part of my reporting for HuffPost’s Staking Claim series, I’ve spoken to the major players in the First Nations community, in government and from the mining companies involved.

They all saw this coming. And none are panicking that the Ring of Fire has been extinguished.

Any insider could see the signs: the many stalls, delays and conflicts between miners and First Nations; miners and government; and government and First Nations.

Just about the only thing the players have agreed upon is the need to “get it right.” The problem is no one has agreed on what that means.

Cliffs has been telegraphing its frustration with the development process every time I have spoken with execs over the past year. It has warned, with growing severity, that it might be “forced” to pull out of the Black Thor chromite project if it doesn’t see better progress. It said so in June, when it halted its Environmental Assessment over a number of uncertainties, and it said so even louder in September when the province denied it the rightto build a road on land held by a rival miner.

For the debt-strapped company struggling with funding expansion in an era of low metal prices, the choice to stop work in the Ring of Fire was simple math. Patricia Perisco of Cliffs explained that projects compete internally for funding and Black Thor was a tough sell.

The U.S. mining giant has called the region unprecedented both in the opportunity to open a new mining region and in the scale of the challenges the company faced.

When Ontario announced earlier this month its idea for a loosely formed development corporation to bring the players together, it was too late. Cliffs didn’t even hold an initial meeting on the topic — it wanted out. And yet, it hasn’t ruled out getting back in, either. The company will continue to talk with First Nations and government (whom it will no doubt lobby for its preferred transportation route).

Cliffs may be ready to re-enter the region by the time Matawa and Ontario finally reach agreement on a number of preliminary issues, which could still be years away.

For its part, the Ontario government, which stands to gain billions in royalties from the potential development, moved swiftly to assure would-be investors the province is still open for business and that the potential in the Ring of Fire is alive.

But it has been anything but swift when it comes to action. More than a decade after discovering riches in the frozen muskeg of the north, no one has been able to penetrate either the earth or ill-defined regulatory walls.

Opposition parties that have for years blamed the government for mismanaging and underestimating the importance of the project used Cliffs’ announcement as an “I told you so” moment.

The government’s nonchalant attitude about the potential loss of the biggest player in the region belies the fact that the piece of the royalty pie it has to divvy up with First Nations just shrunk substantially. There may still be some 20 other miners in the region, but Cliffs’ decision is like Wal-Mart pulling out of a major retail development: it doesn’t mean the project won’t go ahead but it puts the onus on a number of independent boutiques whose pocketbooks are considerably smaller.

As for the people who will be most directly affected by the project, the First Nations communities surrounding the area, they are neither surprised nor fazed by Cliffs’ decision.In fact, they welcome it. They’ve been on this land since time immemorial, have been the victims of development for centuries, and are in no rush for a snap decision or quick resolution.

The people of the Matawa First Nations are ambivalent about the Ring of Fire. They have deep concerns about the impact a new mining region will have on their pristine land, on the animals and fish on which they rely and on their way of life which involves a deep connection to the land.

In Webequie, the fly-in reserve some 500 kilometres north of Thunder Bay that is closest to the Ring of Fire, animals are already fleeing from exploration activities to its east.

There is a tempered enthusiasm toward the jobs, roads and prosperity they’ve been promised, but they’re also jaded following years of broken promises. One young man in Webequie beginning a heavy equipment training program with the possibility of a Ring of Fire job had already trained as a firefighter, land staker and diamond driller with the promise of a steady income. He is still unemployed, like 70 per cent of the reserve.

Matawa’s CEO David Paul Achneepineskum said this week the setback will give First Nations more time to assess the environmental impacts of the development as well as prepare their people for the opportunities it may present.

The tribal council’s chief negotiator Bob Rae made it clear in a tweet that he’s hellbent on pursuing a fair deal “to end (a) cycle of poverty for First Nations,” even with the biggest player gone.

Still, with pressure from Cliffs removed as an impetus to reach a deal quickly, negotiations with the province risk losing focus and dragging on longer.

While no one denies that Cliffs’ move is a game changer, the looming question is whether it’s a game ender.

The First Nations, government and industry players I spoke with answer with a resounding “no.” But industry-watcher and Native legal rights expert Bill Gallagher says their stances are either spin or delusion. The Ring of Fire, he says, is in the “project death zone” and “the biggest missed opportunity on Ontario’s road to resources in a generation.”

Fault will inevitably be assigned: was it that First Nations were “anti-development”? Was the province too slow or too unorganized to act? Or did the miner misjudge how quickly they could put a shovel in the ground?

Any attempt to analyze what went wrong, and whether it can be put right, must go far beyond those surface level questions.

It is a wake-up call that should be answered not with dwelling on what went awry, but instead determining, once and for all, what it actually means to “get it right” in the Ring of Fire.

 

Canadian oil production to rise 75% by 2035, NEB says – Business – CBC News

November 23, 2013 9:45 am / Leave a comment

Canadian oil production to rise 75% by 2035, NEB says – Business – CBC News.

Demand forecast to increase by 28 per cent over the same period

CBC News Posted: Nov 22, 2013 1:04 PM ET Last Updated: Nov 22, 2013 2:41 PM ET

Thermal operations superintendent Ginette MacIsaac poses in handout photo from Shell Canada in Peace River, Alta. A National Energy Board report says Canadian oil production will increase 75 per cent by 2035.Thermal operations superintendent Ginette MacIsaac poses in handout photo from Shell Canada in Peace River, Alta. A National Energy Board report says Canadian oil production will increase 75 per cent by 2035. (Phillip Chin/Canadian Press)

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Canadian oil production will increase by 75 per cent and gas production by 25 per cent by 2035, according to a report by the National Energy Board.

Its energy supply and demand projections report, released Friday, projects Canadian crude oil production of 5.8 million barrels a day by 2035.

The report predicts a steep rise in production of crude from oilsands and from shale, areas that are currently drawing millions in investment by companies such as Encana, Suncor and Royal Dutch Shell.

The figures from the federal regulatory agency come out the same day a poll shows Canadians are coming around to the federal government’s position that oil and gas are the key drivers to the economy.

The NEB says Canadian demand for oil and gas will increase by 28 per cent in the same period, with fossil fuels remaining the primary source of energy for transportation and home heating.

Emissions standards for automobiles should slow consumer need for fossil fuels, the report said.  At the same time, there will be improved energy efficiency across nearly all sectors, allowing the economy to grow more quickly than energy demand.

“By 2035, the energy used per unit of economic output is projected to be 20 per cent lower than in 2012, due to improvements in energy efficiency,” the report said.

 

Power generation will shift away from coal toward gas and renewables at the same time.

But the slow growth of Canadian demand amid rising supply will force the industry to develop export markets.

And that will increase pressure for pipeline development and improved rail development, especially to the U.S. market and the West Coast. The NEB argues infrastructure is a bottleneck to developing export markets.

“Growth in export markets and the infrastructure to access them are key uncertainties in this report’s projections,” the NEB said in its report.

According to the Oil & Gas Journal, Canada ranks third globally in terms of proven oil reserves, behind Saudi Arabia and Venezuela. Canada has an estimated 171 billion bbls, 98 per cent of it in oilsands.

Canada has more energy than it needs

“Canada has vast energy resources – more than enough to meet Canada’s growing energy demand,” said Gaétan Caron, chair of the NEB, adding that oil and gas are a “key driver of the economy.”

The NEB says the “most likely” price for West Texas Intermediate crude will be about $110 US a barrel, about $15 more than it is now. However its report does not predict new policies or political developments that could sway oil prices or affect demand.

The report comes the same day environmental groups are warning that firms investing in the oilsands are running out of room to store the contaminated water that is a byproduct processing crude.

Several firms have obtained permission from provincial authorities to flood abandoned tar sand mines with a mix of tailings and fresh water, but the impact of these toxic lakes on the environment is unknown, the Pembina Institute says.

 

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